Third Circuit Endorses Catalyst Theory for Recovering ERISA Attorney's Fees | Practical Law

Third Circuit Endorses Catalyst Theory for Recovering ERISA Attorney's Fees | Practical Law

In Templin v. Independence Blue Cross, the US Court of Appeals for the Third Circuit held that the catalyst theory of recovery is available under the Employee Retirement Income Security Act of 1974 (ERISA). In addition to holding that a district court used the wrong legal standard in evaluating fee claimants' eligibility for ERISA attorney's fees, the Third Circuit concluded that the district court misapplied factors used by courts in deciding whether to grant or deny fees.

Third Circuit Endorses Catalyst Theory for Recovering ERISA Attorney's Fees

Practical Law Legal Update 8-612-3246 (Approx. 5 pages)

Third Circuit Endorses Catalyst Theory for Recovering ERISA Attorney's Fees

by Practical Law Employee Benefits & Executive Compensation
Published on 08 May 2015 • USA (National/Federal)
In Templin v. Independence Blue Cross, the US Court of Appeals for the Third Circuit held that the catalyst theory of recovery is available under the Employee Retirement Income Security Act of 1974 (ERISA). In addition to holding that a district court used the wrong legal standard in evaluating fee claimants' eligibility for ERISA attorney's fees, the Third Circuit concluded that the district court misapplied factors used by courts in deciding whether to grant or deny fees.
In Templin v. Independence Blue Cross, the US Court of Appeals for the Third Circuit concluded that the catalyst theory of recovery for attorney's fees is available in litigated disputes under the Employee Retirement Income Security Act of 1974 (ERISA) ( (3d Cir. 2015)). The court also held that a district court misapplied a five-factor test used in determining whether to grant or deny attorney's fees.

Background

The plaintiffs in this case, who included two participants under an ERISA-governed health plan, sued the plan's insurer for refusing to cover their claims for certain blood-clotting-factor products. A district court ordered the insurer to review the participants' benefits claims, which the insurer later paid in full. In a second phase of the litigation, the participants sought approximately $1.5 million in interest related to the benefits denial judgment. In a subsequent hearing, the district court indicated that only a portion of the participants' interest request would be appropriate (specifically, $68,000 in interest based on the federal Treasury bill rate). Two months later, the parties reached a settlement under which the insurer agreed to pay $68,000 in interest.
The participants later requested attorney's fees and costs, but the district court denied this motion, reasoning that the participants had not achieved "some degree of success on the merits" under the Supreme Court's Hardt decision (560 U.S. 242, 255 (2010)) (see Practice Note, ERISA Litigation: Attorney's Fees: Revised Standards for Awarding Attorneys Fees under Hardt). The district court concluded that:
  • It had not made a substantive determination regarding whether the participants were entitled to receive interest under ERISA.
  • The parties had reached their settlement outside the courtroom and without judgment from the court.
  • The amount of interest actually received ($68,000) was trivial compared to the millions of dollars the participants originally requested.

Outcome

On appeal, the Third Circuit reversed. The court observed that eligibility for attorney's fees and costs in ERISA disputes:
  • Depends, under Hardt, on whether the moving party has demonstrated some degree of success on the merits.
  • Does not require the moving party to be the prevailing party in the litigation.

Catalyst Theory Is Available under ERISA

According to the Third Circuit, the participants based their attorney's fees claim on the fact that the insurer, as a result of the participants' complaint, voluntarily changed its position and agreed to pay interest. The Third Circuit characterized this approach as a "catalyst theory" argument, and therefore addressed whether the catalyst theory may be used to show some success under ERISA. Under the catalyst theory, a plaintiff is a prevailing party if it achieves the desired result because its lawsuit brought about a voluntary change in the defendant's conduct. Use of the catalyst theory was restricted under a Supreme Court decision that rejected the theory in the context of attorney's fees requests involving statutes with a prevailing party requirement (Buckhannon Board & Care Home v. W. Va. Dep't of Health & Human Resources, 532 U.S. 598 (2001)).
Resolving an open question, post-Buckhannon, the Third Circuit held that the catalyst theory of recovery remains available under ERISA. The court emphasized a clear distinction in Supreme Court case law between statutes that do and do not include a prevailing party requirement, and noted that, under Hardt, ERISA does not limit attorney's fees awards to prevailing parties. The court added that:

Standards for Recovering under the Catalyst Theory

The Third Circuit also addressed the standards for succeeding under a catalyst theory of recovery, holding that:
  • Evidence that judicial activity encouraged defendants to settle is not required.
  • The litigation activity must merely have pressured a defendant to either settle or "render to a plaintiff the requested relief."
The court added that success for purposes of Hardt's "some degree of success" standard need not be the result of a judicial decision. The court characterized Hardt's standard as an "easily traversed threshold." Under the catalyst theory, a party is eligible for attorney's fees if the party's litigation efforts resulted in a victory that is:
  • Voluntary.
  • Non-trivial.
  • More than procedural.
The victory must be apparent to the court without requiring the court to engage in a lengthy inquiry of whether the success was substantial or occurred on a central issue.
Applying this standard, the Third Circuit concluded that the participants were eligible for ERISA attorney's fees because:
  • The pressure of their lawsuit caused the insurer to change its position and provide them the interest they requested.
  • Their success was not purely procedural (for example, winning a motion to intervene).

Misapplication of Factors for Granting or Denying Fees

Under the Third Circuit's process for awarding attorney's fees and costs, a district court:
  • Determines whether a moving party is eligible for attorney's fees (that is, the "some degree of success" standard).
  • Evaluates a five-factor test for determining whether to exercise its discretion to order an award.
Regarding the second step, the Third Circuit concluded that the district court, in declining to grant attorney's fees:
  • Misapplied one of the five factors (involving the offending party's culpability or bad faith).
  • Failed to apply another factor (involving the relative merits of the parties' positions).
As a result, the Third Circuit reversed the district court's order denying attorney's fees and costs, and remanded for further proceedings consistent with its opinion. The Third Circuit expressed no opinion regarding whether attorney's fees should be awarded on remand.

Practical Impact

Plan sponsors that are (or may be) involved in ERISA litigation in the Third Circuit will want to take note of the court's endorsement of the catalyst theory and its characterization of Hardt's "some degree of success" standard as a low one. Together, the rulings offer an expansive reading of when fee claimants are eligible for attorney's fees, including in situations where a court's actions do not encourage litigating parties to settle their dispute.
For a discussion of recovering attorney's fees under ERISA, including analysis of the Supreme Court's Hardt decision, see Practice Note, ERISA Litigation: Attorney's Fees.